The growth of e-commerce for fast-moving consumer goods (FMCG) and groceries has been both a source of concern and opportunity for brick and mortar retailers in the food, drug, and mass (FDM) channels.
Global projections that the share of online FMCG sales would comprise 10% of the total market by 20251 are likely vastly understated given the pandemic’s role as a catalyst for e-commerce growth in the FMCG and grocery space.
US online grocery sales reached $7.2 billion in June, up 9% from May2 and 80% from March when lockdown measures began in most US states3. Approximately 46.5 million US households reported buying groceries online in June.
For traditional retailers within the FDM channel, now is the time to rethink supply chains, redesign core operations, reimagine solutions that meet consumer expectations and retain the confidence of suppliers.
In-store fulfillment of e-commerce orders has been the recent focus of industry giants such as Target, Walmart, Albertson’s, and Whole Foods. This solution could enable FDM retailers to bolster their e-commerce capabilities. An in-store fulfillment strategy enables FDM retailers to align with macro trends such as the Amazon effect and urbanization by utilizing their physical store footprints. It allows proximity to dense customer centers to offer tighter and more frequent same-day delivery windows for a wider array of SKUs. Implementing a store-fulfillment model to a meaningful scale while maintaining the integrity of core retail operations (such as selling and customer service) will require an entirely new approach to store design and operations.
Part of this redesign involves a significant investment in technology and automation to transform the backroom into the nexus of online order fulfillment. Backroom layouts and processes must transform for rapid and cost-effective order fulfillment. Technology that provides real-time inventory visibility is required for a functioning store fulfillment model.
In 2018, Takeoff partnered with Albertson’s, the nation’s second-largest supermarket retailer, to transform the backroom of its stores into micro-fulfillment centers for e-commerce orders, and is currently rolling out the concept in stores in major US cities.
The biggest barrier to store fulfillment in the coming years will not be technology or logistics, but space. Although automated backrooms improve space utilization, the expected growth of e-commerce sales for groceries and everyday goods in the coming years will strain even the largest FDM retailers.
Grocers such as Whole Foods, Kroger, and Giant Eagle addressed this by turning several locations into dark stores dedicated to online fulfillment during the COVID-19 pandemic, and Walmart had been experimenting with dark stores even before the pandemic. 5
Another alternative is to optimize stores for store fulfillment without sacrificing in-store purchases. Such a model will require an expansion of the backroom at the expense of selling space. So, how can retailers reduce physical selling space without diminishing sales, in-store customer experience, and supplier relationships? The solution is a combination of data-driven SKU rationalization, innovative in-store merchandising, and a focus on the digital shelf.
Retailers must make careful, data-driven decisions allocation of inventory in a limited selling space.
In-store use of technology and insights can help to make critical allocation decisions.
These technologies include sensors that measure dwell-time, in-store aisles using smartphone signals, and eye-tracking technology that generates heat maps of store shelves to understand which products have the highest consumer engagement.
Digital solutions such as labels /QR codes that take the consumer to the brand’s page with ready product information and reviews, can replace traditional product displays and end-caps. This not only improves utilization of floor space but also provides an opportunity for personal interaction. Suppliers can use this digital platform to alter and test promotional messages in near-real-time. AI and advanced analytics can fine-tune these messages over-time.
There are innovative ways to ensure that the products allocated to the backroom receive proper exposure in the store. One possible solution is inspired by my experience working for a leading producer of construction equipment. This company’s target consumer are professional contractors who typically know exactly what they need before arriving at the store, and thus do not spend much time shopping around the aisles. These insights inspired the design of a new store layout in which screws, anchors, drill bits, bolts, and other consumables are stored in the back room, rows of shelves removed from the sales floor, and “menus” with itemized SKU lists grouped by category and denoted by product number line the outer walls of the store. The customer simply references the product number on the menu and conveys it to the store rep, who retrieves the items from a well-organized backroom.
Much like the above example, FDM retail consumers increasingly know what they want before they arrive.
In this case, however, touch screens at checkout areas and mobile apps would replace the physical menus, giving customers visibility to all in-store SKUs via digital shelves that mirror the retailer’s e-commerce site, creating a true omni-channel experience. As soon as the consumer finalizes the purchase and begins entering payment information, the SKUs in the backroom are picked, bagged, and brought to the consumer. This allows retailers to optimize their store layout for store fulfillment without diminishing the in-store experience. Brands can send micro-targeted promotions to the customer’s mobile device during the store visit or create digital displays for the in-store screens that will drive impulse purchases. Real-time inventory visibility and tracking systems will be as critical for storefront operations as it is for the backroom.
The road ahead for brick and mortar stores
During COVID-19, retailers have realized that store fulfillment must counter the threat of e-commerce pure-play competitors and subscription services.
To succeed, companies must
- Invest in the right technology
- Develop process excellence
- Redesign and repurpose the store itself
- Select capable transportation and logistics partners or build out logistics capabilities from within
- Effectively communicate the value of in-store fulfillment to suppliers to generate buy-in
- Select appropriate KPIs to measure success.
It will be a massive undertaking for any retailer in this space, but the opportunities to offer new services and experiences to customers through a redesigned store will ensure a place for brick-and-mortar FDM retailers in the new retail landscape.
Senior Consultant, Infosys Consulting
Michael is experienced in logistics management and has worked with clients across multiple industries, adding value through productivity improvement and cost reduction. Michael’s experience in the consumer products sector includes projects in consumer marketing and retail inventory management. Michael has an MBA from Owen Graduate School of Management, Vanderbilt University, Tennessee, USA. He specializes in consumer brands, retail and transportation. He is based out of our office in Chicago, Illionois and can be reached at firstname.lastname@example.org
Associate Partner, Infosys Consulting
Sylvie is a passionate and results-oriented supply chain executive. Her experience with supply chain start-ups has demonstrated to her that supply chain professionals must question the status quo in order to deliver next-generation solutions. She is a believer in hands-on experimentation in order to deliver maximum results. Sylvie has developed and implemented numerous supply chain transformation initiatives for her clients and has extensive experience working with leading retailers and consumer brand owners. A supporter of lifelong learning, she continues to seek out fresh and innovative new ideas and insights through a network of supply change thought leaders. She is also giving back to the field as a guest lecturer at the University of Maryland.